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Stock Market Emotion

Cold, rational decisions made by traders caught in the throes of the financial markets may not be as heartless as they're cracked up to be. For the first time, researchers have monitored physiological indicators of emotional state in financial securities traders at work in real-time market trading. Their results suggest that emotion may influence decisions even when Wall Street's opening bell rings.

In recent years, scientists have begun to suspect that emotion plays an important role in evaluating risk and making decisions (ScienceNOW, 21 March). But stock traders are trained to evaluate risk and information quickly and reliably, and they often have large financial incentives riding on their decisions--which should cut down on bouts of nonrational behavior. Even so, earlier studies have suggested that many successful traders base their trades on intuition.

To determine whether emotion plays a role in traders' intuition, Andrew Lo, a finance professor at the Massachusetts Institute of Technology, and Dmitry Repin, a neuroscientist at Boston University, now at MIT, monitored the heart rate, blood pressure, and skin conductance of 10 professional traders during the course of a normal day. They also collected real-time financial information, recording the prices and trends of the 13 foreign currencies and two stock futures that the traders were eyeing and manipulating. The researchers evaluated the physiological responses to three general types of events: trends, in which stock prices march steadily in one direction; trend reversals; and volatility events, in which prices fluctuate all over the map. Even the most hard-boiled trader has heart palpitations during volatility events, and less experienced traders can react emotionally to a broader swath of market behavior, Lo and Repin report in the April issue of The Journal of Cognitive Neuroscience. This physiological evidence suggests that emotion may be at the bargaining table during trader's decisions, Lo says.

The study can't get at whether emotionally fueled intuition drives a professional trader to avoid a bad trade, points out neuroscientist Antoine Bechara of the University of Iowa in Iowa City, because the researchers didn't monitor how the trade turned out. But he approves of the team's approach of monitoring the traders at work because it captures the person making decisions in a habitual, true-to-life environment, rather than a contrived laboratory task.